Nonqualified Stock Options
Nonqualified stock options (NQSOs) are also known as nonstatutory stock options. You report NQSO income differently than you report income from these:
- Incentive stock options (ISOs)
- Options granted under an employee stock purchase plan
When you receive NQSOs, you usually don’t recognize income until you exercise the options. You don’t have total control over the stock. If you don’t exercise your options within the required time period, you’ll lose them.
To learn more, see Publication 525: Taxable and Nontaxable Income at www.irs.gov.
However, the option might have a readily determinable market value. If so, you’ll have to recognize income when you receive the option. Options traded in an open market have market values that are easily determined. (Ex: Traded on the New York Stock Exchange)
When you exercise your options, the difference in these is equal to your W-2 income:
- Option price
- Fair market value (FMV) on the date you exercised your options
Your employer will include that amount on your W-2, Box 1. The code “V”will be in Box 12.
The difference between the option price and the FMV when you exercised your option is included in your W-2 income. So, you’ll have already paid taxes on it. The basis of the stock is the FMV of the stock on the date you exercised the options.
You’ll use this equation:
Amount you paid + amount included in your income = FMV
You can often do a paperless transaction in which you exercise your NQSOs and sell the stock at the same time. Even though you perform only one transaction, it’s really two transactions: You exercised your options, and you sold the stock.
Do you need to report every stock trade on a Schedule D for tax purposes. Learn more from the tax experts at H&R Block.
Learn more about Form 8690 and the IRS net investment income tax from the tax experts at H&R Block.
As end-of-year approaches, taxes owed can become a major headache. Plan ahead by considering 529 Tax Deductions and other end-of-year savings options.
What is a capital gain distribution? Learn more about form 1099-Div Box 2A and get tax answers at H&R Block.